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Office of Planning and Budgeting

Moody’s Gives Higher Education a Negative Outlook

Last week, Moody’s Investors Service issued a negative short-term outlook for the entire sector of higher education based on its conclusion that every traditional revenue source for even the most elite colleges and universities is under pressure. That pressure, according to the report, is the result of nation-wide economic, technological and public opinion shifts, which are largely beyond institutions’ control.

The outlook report, released annually, articulates the fundamental credit conditions that Moody’s expects higher education will face during the next 12 to 18 months. For the last two years, Moody’s gave elite colleges and research universities a stable forecast; but this year, the following factors contributed to a negative outlook for the entire industry:

Struggling Revenue Sources:

State appropriations are unlikely to increase meaningfully due to weak economic recovery.

Federal spending on research and student aid could be truncated in response to the nation’s fiscal concerns.

Tuition revenue continues to be suppressed by low family incomes and public/political pressure to keep prices down.

Endowment returns are vulnerable to any economic volatility that could stem from federal tax and budget decisions.

Donations are not expected to increase and could face pressure as Congress evaluates associated tax deductions.

Financial diversity is no longer helpful as all revenue streams are strained.

Additional Challenges:

Student debt and loan default rates have increased and thus challenged the perceived value of a degree.

High school graduates are declining in number.

Public and political scrutiny of efficiency and degree value could add to institutions’ list of regulatory requirements.

New technologies such as online learning and MOOCs could provide new revenue opportunities, but could also undermine traditional higher ed models.

Moody’s analysts warn that revenue streams will never rebound to post-2008 levels and leaders in higher education will need to adapt by thinking strategically and adjusting their operations.

But not all is gloom and doom. Although Moody’s gave higher education a negative outlook, most of the country’s top colleges and universities still hold the strong credit rankings. The UW, for one, continues to maintain a Aaa credit rating—the highest offered by Moody’s. Additionally, the report stressed that the intrinsic value of and demand for higher education remains stable.